July 25 (Bloomberg) -- The prospect that Russia’s state
banks will be shut out of European bond markets is prompting
some of the region’s biggest money managers to reassess their
holdings, as it drives up borrowing costs at the lenders.

The yield on VTB Group’s dollar-denominated perpetual bonds
jumped 36 basis points to 10.04 percent, taking the increase
since the U.S. announced fresh Russian sanctions last week to 95
basis points. OAO Sberbank’s November 2019 euro security climbed
28 basis points to 4.57 percent, the highest since being sold
last month.

European Union officials are weighing a ban on purchases of
bonds or stocks sold by the country’s state-controlled banks,
according to a proposal presented to member states. Aviva
Investors Ltd. and Norway’s $890 billion sovereign wealth fund
said they’re reviewing their assets in Russia should the
penalties be adopted by a unanimous vote of EU leaders.

“A fundamental reassessment is required,” Aaron Grehan, a
London-based fund manager who helps oversee $4.5 billion in
emerging-market debt at Aviva, said by e-mail yesterday. “The
situation has deteriorated rapidly and we are faced with the
risk of further sanctions that could be significantly credit
negative, but as important is the investor sentiment for Russian
debt.”

‘Bad Marriage’

Delegation chiefs from the 28 EU governments got a first
look yesterday at a range of measures to curb Russia’s access to
capital markets and energy-production technology.

“The market is right to pay attention to sanctions,” Jan
Dehn, London-based head of research at Ashmore Group Plc, which
has about $70 billion in emerging-market assets under
management, said by e-mail yesterday. “Having said that, Europe
and Russia are very closely integrated economically, in effect
they are locked in a bad marriage. Meaningful sanctions by
Europe against Russia would therefore likely backfire.”

‘Negative Implications’

Since the July 17 downing of Malaysia Airlines flight MH17
by a missile that the U.S. says was probably supplied by the
Russian military, sentiment toward the nation’s assets has
soured further. The government of Norway, which isn’t an EU
member, said it’s ready to adjust its wealth-fund holdings to
reflect the changing geopolitical climate.

Russia supplies about 30 percent of the EU’s natural gas,
with the Russian share in gas imports as high as 75 percent in
an arc of countries stretching from Estonia in the north through
Austria and Greece in the south.

The tougher sanctions would have “little impact in the
short run,” Viktor Szabo, a London-based money manager who
helps oversee more than $13 billion in emerging-market debt at
Aberdeen Asset Management Plc, said by e-mail.

In the longer run, sanctions would undermine the “already
weak investor sentiment” and increase financing costs “with
all its negative implications on the potential growth rate and
later on reserves,” he said. Szabo said he’s underweight for
all Russian assets.